Spotify reveals that 2 million free users were dodging advertisements by using ad-blocking apps

Spotify said about 31% of shares will be available for sale on the first day of trading. REUTERS/Christian Hartmann

Spotify revealed that 2 million free users, 1.3 % of its total user base, have been dodging ads through unauthorized apps.

As a result, Spotify reduced its monthly active user count of 2017 from 159 million to 157 million to account for the fraudulent users.

The company disclosed this information prior to its scheduled April 3 public offering.

Spotify has restated key usage metrics for 2017 leading up to its IPO next month, claiming it recently discovered 2 million users had been accessing the free version of the streaming-music service using unauthorized apps that blocked ads.

"On March 21, 2018, we detected instances of approximately two million users as of December 31, 2017, who have been suppressing advertisements without payment," the company said in an amended F-1 filing Friday with the SEC.

Spotify made the disclosure ahead of its planned April 3 public offering on the New York Stock Exchange, in a nontraditional direct-listing IPO. The 2 million fraudulent users represented 1.3% of its previously reported total user base.

Earlier this month, Spotify confirmed that it had begun cracking down on use of unauthorized apps, designed to circumvent the limitations of Spotify's free service. That includes disabling ads between tracks and accessing on-demand playback on mobile devices — features available in Spotify Premium, which costs $9.99 per month.

As a result of the fraudulent activity it identified, Spotify reduced its monthly active user count as of the end of 2017, from 159 million to 157 million total. That includes 71 million paying premium subscribers.

In addition, the company restated the total number of content-hours streaming in 2017, by 1.2%, to account for the unauthorized usage. Previously, Spotify said users worldwide consumed 40.3 billion hours of audio and video last year; now it says users accessed 39.8 billion hours of content.

Spotify said that "we currently do not have, and may never have, the requisite data available to adjust such key performance indicators and other metrics prior to January 1, 2017, and as a result, such key performance indicators and other metrics for such periods may be overstated."

In the risk factors outlined in its IPO filing, Spotify noted, it says it is "at risk of artificial manipulation of stream counts and failure to effectively manage and remediate such fraudulent streams could have an adverse impact on our business, operating results, and financial condition."

In a filing Tuesday, Spotify said about 31% of its outstanding shares (55.7 million of 178.1 million total) will be available for sale on the first day of trading. Spotify CEO Daniel Ek is eligible to sell 15.8 million shares (less than one-third of his total holdings).